May 5 (Bloomberg) -- For Goldman Sachs Group Inc. and
Morgan Stanley, two of Wall Street’s biggest commodities-trading
firms, the year’s largest initial public offering represents a
nightmare come true: the rise of unregulated rivals.

In the wake of the financial crisis, governments and
regulators such as the Federal Reserve and Basel Committee on
Banking Supervision are cracking down on risk-taking at New
York-based banks like Goldman Sachs and Morgan Stanley. At the
same time Glencore, a 37-year-old company that primarily focuses
on physically moving commodities around the world, faces no
limits on leverage, proprietary trading or compensation.

“Glencore is unregulated and competes in many of the same
businesses,” said William D. Cohan, author of “Money and
Power: How Goldman Sachs Came to Rule the World” and a
contributing editor to Bloomberg. “It’s based in Switzerland
and can do a lot of things that Goldman can’t do anymore.”

The commodities desks of Wall Street’s biggest banks have
long competed with closely held specialists such as Cargill Inc.
in Minneapolis, Paris-based Louis Dreyfus & Cie and Geneva-based
Vitol Group that, like Glencore, produce and trade commodities
and have operated with little oversight.

Racketeering, Tax Evasion

Glencore’s decision to go public in London and Hong Kong,
which promises to make billionaires out of Glasenberg and four
other executives, shows the firm believes it can overcome a
history of secrecy. Founder Marc Rich and his partner Pincus
Green fled the U.S. for Switzerland in 1983 just before being
indicted on 65 counts of wire fraud, racketeering, tax evasion
and violating a U.S. embargo by trading with Iran. President
Bill Clinton pardoned them in 2001.

Glencore produces and trades metals and minerals such as
aluminum, cobalt and zinc, energy products like oil and coal, as
well as grains, cotton, sugar, oils and oil seeds. Among its
holdings in publicly traded companies is an almost 35 percent
stake in Xstrata Plc, a Zug, Switzerland-based mining company
with a market value of 42.9 billion pounds ($71 billion) on the
London Stock Exchange.

Glencore employs 57,500 workers either directly or
indirectly and generated $145 billion of revenue on $79.8
billion of assets last year, according to its website.

Kazakhstan, Bolivia

Glasenberg, a South African who joined Glencore in 1984 and
became CEO in 2002, participated in a management-led buyout of
the business from Rich in 1994. Glencore has made its name by
acquiring and trading commodities in places such as the
Democratic Republic of Congo, Kazakhstan and Bolivia.

In its IPO prospectus filed yesterday, Glencore disclosed
that subsidiary Glencore Grain Rotterdam BV, a former employee
and one current employee have been charged in Belgium with
corruption. The criminal charges allege an exchange of non-public information while applying for European export subsidies,
Glencore said.

“Glencore is probably making the call that to get involved
in larger deals it is worth having to engage in its business
more transparently,” said Richard Baumann, a partner who
specializes in securities law at Morrison Cohen LLP in New York.
“As a big derivatives trader, and to the extent it operates
like a big quasi-bank, systemic regulators around the world
might see a need to regulate Glencore more.”

Volcker Rule

By contrast, Goldman Sachs and Morgan Stanley, the two
biggest U.S. securities firms until September 2008, are already
bank holding companies under Federal Reserve supervision. The
Dodd-Frank financial-regulation law enacted last year includes
the so-called Volcker rule, which limits banks that get federal
assistance such as deposit insurance from proprietary trading,
or making bets with their own money.

Glencore, like rivals such as Hong Kong-based Noble Group
Ltd. and Amsterdam-based Trafigura Beheer BV, can take bigger
trading risks in the commodities markets, helping to make them
more profitable and more appealing as employers for top traders.

“Prop trading remains as a potent incentive to join
Glencore, Noble, Trafigura and any of the major trading firms
not restricted by banking rules,” said George H. Stein,
managing director of Commodity Talent LLC, a recruitment firm in
New York.

Glencore’s average 2010 value-at-risk, a measure of how
much the firm’s traders could lose in a single day, jumped to
$43 million from $27 million in 2009, according to the firm’s
annual report. Goldman Sachs’s commodity price value-at-risk
dropped to $33 million in 2010 from $36 million in 2009, company
data show.

Shareholder Capital

Goldman Sachs’s return on equity, a measure of how well the
firm reinvests shareholder capital, dropped to 11.5 percent in
2010 from about 33 percent three years earlier, before the
crisis. Glencore has achieved an average return on equity of 38
percent, according to a research report by UBS AG, one of the
IPO’s underwriters.

The Dodd-Frank Act also requires agencies like the
Commodity Futures Trading Commission, the Fed and the Securities
and Exchange Commission to establish margin requirements as a
way of limiting risk in the $583 trillion global swaps market.
Regulators are debating whether to exempt commodity producers,
refiners and consumers, known as “end users,” from the
requirements.

Glencore, because it owns and operates mines and
refineries, could win such an exemption, according to two
veterans of Wall Street commodity-trading desks who spoke on the
condition of anonymity because they weren’t authorized to speak
publicly.

Wealth Creation

Glencore’s IPO is also a challenge to Wall Street’s banks
because of the level of wealth it’s creating. When Goldman Sachs
went public, then-CEO Henry M. Paulson’s stock was worth $219
million and then co-chief operating officers John A. Thain and
John L. Thornton were each worth about $160 million apiece.
That’s dwarfed by Glasenberg’s potential $9.6 billion stake.

“When Goldman was going public, that was the Glencore of
12 years ago, in other words everybody wanted to work at
Goldman,” said author Cohan. “Now, it’s like ‘Oh, Goldman,
yawn.’”

Even at hedge funds, the source of some of Wall Street’s
greatest riches, Glencore’s IPO has been a source of envy.

A trader at a multibillion-dollar hedge fund, who didn’t
want to be identified because he’s not authorized to speak
publicly, said he turned down Glencore because he thought
he could earn more at a hedge fund. That turned out to be a
mistake, he said.